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Real Estate

Real Estate

Real estate is different than other consumer sectors of spending. It’s obviously not consumable like food or clothing. But it’s not like a durable product either, like cars and washing machines. Real estate, with the exception of natural disasters or human insanity (arson, wars, etc.), tends to last forever.

The result in net housing demand, allowing for later retirement in the future is a whole different, and more sobering, picture…

Yes, residential real estate will never be the same. It most certainly will be nothing like what we experienced into 2005.

The same logic applies to commercial real estate. It gets hit harder in downturns as businesses voluntarily abandon leases and real estate faster than households do (after all, we’re more emotionally attached to our homes!).

Commercial real estate is driven by the combination of new entrants adding to the workforce at age 20 (on average) and leaving the workforce when they retire at age 63.

It should be no surprise that prime city real estate is priced sky-high worldwide. Buyers are paying so much for commercial buildings that their rental income is just too low. This is typical for the real estate cycle, but we’re approaching the top of the roller coaster. It all comes rushing down at some point.

But real estate, especially trophy buildings in the most important cities, is still one of the best ways to make fortunes. When economies soften, it’s these buildings that stay rented – and at top rates. Weathering the storm is key, regardless if you’re a regular investor or a billion-dollar CEO managing a brand.

The trends in commercial real estate aren’t as bad as they are in the residential space because baby boomer retirements peak in 2026 while their deaths don’t peak until around 2044.

Then there’s the retail sector that will be impacted by the natural spending trends reflected in our Generational Spending Wave. Those trends, in the U.S., peaked in late 2007. Only massive QE has offset those declines and limited the effects… but that can’t continue forever.

But besides the demographic challenges the commercial sector faces, there’s another demon out for blood. Amazon, among many other Internet-retailers, are taking market share from brick-and-mortar stores. Major warehouses skip the retail level and ship direct, don’t use as much real estate space, and certainly not prime/Main Street space. Unless we have some major catastrophe that sees us return to a world with no Internet, I don’t see this trend reversing!

So, what will do well, in an aging and Internet-intensive world with less need for brick-and-mortar real estate? Affordable rental residential real estate aimed at the younger millennials and retiring baby boomers. The same goes for vacation and retirement sectors, but only after they crash in the next three years or so, and only into around 2026 or 2027.

With a smaller generation (echo boomers) following a larger generation (baby boomers) for the first time in history, we’re caught in the trap of “diers” vs. “buyers.”

Essentially, millions more people will be leaving the housing market than entering it. With sellers drastically exceeding buyers, there will be a huge housing glut. And as we learned in Economics 101, when supply outpaces demand, prices drop proportionally.

But demographics also tell us other important things about real estate. Just as the aging of baby boomers and echo boomers will cause the next housing market crash, it will have widely varying effects on other real estate categories and geographies. That will create a number of profitable opportunities for those who are savvy enough to take advantage of these little understood trends, just like those we mentioned earlier.

Keep up with the changing real estate market, and where other opportunities will present themselves in Economy & Markets!

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